Did you ever wonder about the startup scene in St. Petersburg and Moscow? I spent this summer in St.Petersburg and Moscow and did some deep research. Earlier I was quite unaware - therefore I was pleasantly surprised and excited to find out how vibrant and ambitious the scene really is! Watch out for the Russians ;-)!!
Here are 8 points you should know.
1. IP
Intellectual property protection in Russia is basically absent. The Russian Internet provides you in a matter of minutes with free music, movies and programs. Besides torrent and the regular filesharing platforms you can find many sites that offer various content.
On Russia's most popular social network vkontakte.ru - a Facebook copycat - you can listen to free songs and watch movies of your choice. Due to the free media the vkontakte offers to its users it enjoys an enormous popularity. People spend hours on vkontakte listening music and watching movies.
Ultimately the culture of free media challenges the potential monetization of many sites and makes it hard to create valuable business model for new startups in that sphere.
2. Payments and delivery
The Russian internet - also called "Runet" - is still lagging behind with e-commerce. People don't trust online sales. Buying books, electronic devices and gadget still happens mostly offline. There are many "Internet shops" - but most are information sites with advertisement. If you want to buy something you need to visit the good old store or request a courier and pay cash.
I believe online payment and delivery are the major challenges.
People don't trust the credit card. In fact they rather rely on a local pre-paid systems that are provided by Yandex and Webmoney.
The problem of delivery is that it is very undeveloped. You can hardly find reliable services such as DHL - the biggest international player in Russia - UPS or FedEx. Their market share is still very small.
There is also a state post but ... Well, lets say it exists.
3. Advertisement
Due to the inability to sell online a majority of companies consider the Internet as just another advertisement channel similar to Print, TV or Radio.
I can't disagree with them. Many small companies online are surviving with the "good old" advertisement revenue model.
Most of the sweet ad money goes to Yandex. It is Russia's most popular search engine and has an estimated yearly revenue of $300M.
Throughout the research I had the feeling that nobody really cares about how effective the ad rubbles are spent.
Widely spread is the classic concept of a website + SEO + Yandex's "AdWords" to drive traffic.
Viral ads and advertising in social networks is still sort of exotic here.
4. Telecommunication
Are you looking for an serious investment opportunity? The telecommunication industry enjoys an extremely good reputation and is booming in Russia.
I am subsuming infrastructure and network providers for mobile, internet and telephone.
Russia was among the first countries that commercially adopted the 4G networks for wireless WiMax Internet access. It is provided by Yota and some other players.
Today you can actually can get a WiMax connection almost everywhere in Moscow and St.Petersburg! This is something that you can only dream of in San Francisco!
People really LOVE their cell phones in Russia. Even people with low income may buy 2-3 smartphones for $500+ per year!
A lot of interesting things build on this trend - mobile payments, growing internet coverage, expensive smartphones without contracts, etc.
On the other side - if you leave Moscow or St. Petersburg you can have a hard time finding a reliable and cheap cable Internet connection.
But I am not doubting that the successful business with internet in the cities will also bring a change in regions of Russia.
5. Copycats
Russian Internet entrepreneurs hate copycats but continue to do them and many are successful! The schizophrenic attitude is amusing.
If you accuse somebody of doing a copycat you would most likely get a very negative to life threatening reaction.
I was positively surprised how the culture of respect for innovation is very strong. People are ready to defend their ideas as something innovative that never existed anywhere on the Earth before ;-)!
Russians are very proud on their culture and believe in their uniqueness and will to lead the way rather than to follow.
6. Mega projects and Nano actions
Russians think big. Even today the cold war is still present in the minds of people here.
You may hear slogans like "We must be the first in ..." or "We must become the next Silicon Valley and nothing less."
The question is how to get there.
Unfortunately investments in megalomanic construction projects are still more prominent than investing more money in education or funding of prospective startups.
The government invests billions in Nanotechnology! Large technoparks are built in every region - even in places such as Komi! I am not sure if that is the best way to spend the state funds!
People in Russia learned to support big projects without any meaning. A vision with the perspective to change Russia from bottom up is missing.
Sometimes I feel that these huge projects with their ambitious goals are very popular in the government because its easier to steal some money from a ten billion $ project than from a $100k for a startup! :)
7. Language
The Majority of Russians don't speak English and don't want to learn it! Somehow most of the people believe in the myth that Russians are welcome all over the world because of their filled wallets. This idea is strongly supported by the media.
They expect that a waiter in NYC will say "Spacibo!" after receiving a hundred bucks on tips. It isolates the Russian speaking hemisphere from the rest of the world and slows down the exchange between Russia and the rest of the world.
8. Investors
I believe there is a big lack of "smart money" here. 90% of the startups I met are in need of good advice rather than money. While there are people with money who are ready to invest - very few of them can support startups with knowledge.
Also smart Angel Investors are hard to find since there are only a small number of successful exits in Russia so far.
The government and companies controlled by government are today the biggest investors. I don't want to get into details but my best evaluation of some of their investment decisions is: "mysterious".
Conclusions:
This is a summary of things that I believe to be important:
1. The enforcement of IP laws can turn into a major opportunity for companies. Since all major laws are present its all about the government to turn them into reality.
After a few Russians will receive criminal records and these cases will receive sufficient PR - something that the government has excellent expertise in - the situation will hopefully improve.
2. As soon as the the delivery business will become more reliable and cheaper online shops could quickly find acceptance.
3. Online payments are the basis for a sprouting internet business. The problem of online payments is more about adoption but also about the enforcement of consumer rights and technological solutions.
There is still no Russian "PayPal" and PayPal itself doesn't work in Russia. Local pre-paid systems are just ... ugly ).
4. Education must be improved dramatically - especially the learning of the English language. The Government has the money to get English speaking teachers in every school and Universities.
Russia needs to stop believing that their education is exceptionally good. Some serious goals need to be set to reform the education system.
5. I think Russian funds, investors and the Government can learn a lot from international companies and should NOT be ashamed to invest in them. So far we have heard about DST investing in Facebook and some exceptions as the acquisition of livejournal.
I am wondering about all the big recent deals including Skype, Zappos, Friendfeed, Sun, MySQL, etc.? I believe the "dirty" oil money is worth the shares of any of these companies.
Of course valuable terms must be set in order to create new offices in Russia, to teach local employers and stimulate a technology exchange in order to strengthen the Russian economy.
Already today most of the technoentrepreneurs in Moscow and St. Petersburg came out of international companies.
The government should keep in mind the example of Peter the Great - a Russian monarch - who went to the Netherlands to learn carpenter skills to build the Russian marine.
6. In order to increase international Investments - the overall security and legal reliability in Russia must be improved I believe. Otherwise its hard to imagine that global players will be strategically interested in the Russian market.
By "strategically" I simply mean long term investments excluding oil and other natural resource related investments.
7. The green, clean and renewable energy industry is highly underestimated in Russia. While Russia is a big player on the global energy market - it pays little to no attention environmental issues.
8. Telecommunication is a booming business. The trend of rapid consolidation in this market ensures a reliable infrastructure in the near future for new venture and it could give international investors a good basis to enter the Russian market.
------
This post was written by Vlad Gurgov.
Special Thanks to Bjoern Herrmann for editing.
Here are 8 points you should know.
1. IP
Intellectual property protection in Russia is basically absent. The Russian Internet provides you in a matter of minutes with free music, movies and programs. Besides torrent and the regular filesharing platforms you can find many sites that offer various content.
On Russia's most popular social network vkontakte.ru - a Facebook copycat - you can listen to free songs and watch movies of your choice. Due to the free media the vkontakte offers to its users it enjoys an enormous popularity. People spend hours on vkontakte listening music and watching movies.
Ultimately the culture of free media challenges the potential monetization of many sites and makes it hard to create valuable business model for new startups in that sphere.
2. Payments and delivery
The Russian internet - also called "Runet" - is still lagging behind with e-commerce. People don't trust online sales. Buying books, electronic devices and gadget still happens mostly offline. There are many "Internet shops" - but most are information sites with advertisement. If you want to buy something you need to visit the good old store or request a courier and pay cash.
I believe online payment and delivery are the major challenges.
People don't trust the credit card. In fact they rather rely on a local pre-paid systems that are provided by Yandex and Webmoney.
The problem of delivery is that it is very undeveloped. You can hardly find reliable services such as DHL - the biggest international player in Russia - UPS or FedEx. Their market share is still very small.
There is also a state post but ... Well, lets say it exists.
3. Advertisement
Due to the inability to sell online a majority of companies consider the Internet as just another advertisement channel similar to Print, TV or Radio.
I can't disagree with them. Many small companies online are surviving with the "good old" advertisement revenue model.
Most of the sweet ad money goes to Yandex. It is Russia's most popular search engine and has an estimated yearly revenue of $300M.
Throughout the research I had the feeling that nobody really cares about how effective the ad rubbles are spent.
Widely spread is the classic concept of a website + SEO + Yandex's "AdWords" to drive traffic.
Viral ads and advertising in social networks is still sort of exotic here.
4. Telecommunication
Are you looking for an serious investment opportunity? The telecommunication industry enjoys an extremely good reputation and is booming in Russia.
I am subsuming infrastructure and network providers for mobile, internet and telephone.
Russia was among the first countries that commercially adopted the 4G networks for wireless WiMax Internet access. It is provided by Yota and some other players.
Today you can actually can get a WiMax connection almost everywhere in Moscow and St.Petersburg! This is something that you can only dream of in San Francisco!
People really LOVE their cell phones in Russia. Even people with low income may buy 2-3 smartphones for $500+ per year!
A lot of interesting things build on this trend - mobile payments, growing internet coverage, expensive smartphones without contracts, etc.
On the other side - if you leave Moscow or St. Petersburg you can have a hard time finding a reliable and cheap cable Internet connection.
But I am not doubting that the successful business with internet in the cities will also bring a change in regions of Russia.
5. Copycats
Russian Internet entrepreneurs hate copycats but continue to do them and many are successful! The schizophrenic attitude is amusing.
If you accuse somebody of doing a copycat you would most likely get a very negative to life threatening reaction.
I was positively surprised how the culture of respect for innovation is very strong. People are ready to defend their ideas as something innovative that never existed anywhere on the Earth before ;-)!
Russians are very proud on their culture and believe in their uniqueness and will to lead the way rather than to follow.
6. Mega projects and Nano actions
Russians think big. Even today the cold war is still present in the minds of people here.
You may hear slogans like "We must be the first in ..." or "We must become the next Silicon Valley and nothing less."
The question is how to get there.
Unfortunately investments in megalomanic construction projects are still more prominent than investing more money in education or funding of prospective startups.
The government invests billions in Nanotechnology! Large technoparks are built in every region - even in places such as Komi! I am not sure if that is the best way to spend the state funds!
People in Russia learned to support big projects without any meaning. A vision with the perspective to change Russia from bottom up is missing.
Sometimes I feel that these huge projects with their ambitious goals are very popular in the government because its easier to steal some money from a ten billion $ project than from a $100k for a startup! :)
7. Language
The Majority of Russians don't speak English and don't want to learn it! Somehow most of the people believe in the myth that Russians are welcome all over the world because of their filled wallets. This idea is strongly supported by the media.
They expect that a waiter in NYC will say "Spacibo!" after receiving a hundred bucks on tips. It isolates the Russian speaking hemisphere from the rest of the world and slows down the exchange between Russia and the rest of the world.
8. Investors
I believe there is a big lack of "smart money" here. 90% of the startups I met are in need of good advice rather than money. While there are people with money who are ready to invest - very few of them can support startups with knowledge.
Also smart Angel Investors are hard to find since there are only a small number of successful exits in Russia so far.
The government and companies controlled by government are today the biggest investors. I don't want to get into details but my best evaluation of some of their investment decisions is: "mysterious".
Conclusions:
This is a summary of things that I believe to be important:
1. The enforcement of IP laws can turn into a major opportunity for companies. Since all major laws are present its all about the government to turn them into reality.
After a few Russians will receive criminal records and these cases will receive sufficient PR - something that the government has excellent expertise in - the situation will hopefully improve.
2. As soon as the the delivery business will become more reliable and cheaper online shops could quickly find acceptance.
3. Online payments are the basis for a sprouting internet business. The problem of online payments is more about adoption but also about the enforcement of consumer rights and technological solutions.
There is still no Russian "PayPal" and PayPal itself doesn't work in Russia. Local pre-paid systems are just ... ugly ).
4. Education must be improved dramatically - especially the learning of the English language. The Government has the money to get English speaking teachers in every school and Universities.
Russia needs to stop believing that their education is exceptionally good. Some serious goals need to be set to reform the education system.
5. I think Russian funds, investors and the Government can learn a lot from international companies and should NOT be ashamed to invest in them. So far we have heard about DST investing in Facebook and some exceptions as the acquisition of livejournal.
I am wondering about all the big recent deals including Skype, Zappos, Friendfeed, Sun, MySQL, etc.? I believe the "dirty" oil money is worth the shares of any of these companies.
Of course valuable terms must be set in order to create new offices in Russia, to teach local employers and stimulate a technology exchange in order to strengthen the Russian economy.
Already today most of the technoentrepreneurs in Moscow and St. Petersburg came out of international companies.
The government should keep in mind the example of Peter the Great - a Russian monarch - who went to the Netherlands to learn carpenter skills to build the Russian marine.
6. In order to increase international Investments - the overall security and legal reliability in Russia must be improved I believe. Otherwise its hard to imagine that global players will be strategically interested in the Russian market.
By "strategically" I simply mean long term investments excluding oil and other natural resource related investments.
7. The green, clean and renewable energy industry is highly underestimated in Russia. While Russia is a big player on the global energy market - it pays little to no attention environmental issues.
8. Telecommunication is a booming business. The trend of rapid consolidation in this market ensures a reliable infrastructure in the near future for new venture and it could give international investors a good basis to enter the Russian market.
------
This post was written by Vlad Gurgov.
Special Thanks to Bjoern Herrmann for editing.
